The Political Economy of Education, Financial Literacy, and ...

[Pages:18]The Political Economy of Education, Financial Literacy, and the Racial Wealth Gap

Darrick Hamilton and William A. Darity, Jr.

This article examines the mismatch between the political discourse around individual agency, education, and financial literacy, and the actual racial wealth gap. The authors argue that the racial wealth gap is rooted in socioeconomic and political structure barriers rather than a disdain for or underachievement in education or financial literacy on the part of Black Americans, as might be suggested by the conventional wisdom. Also, the article presents a stratification economic lens as an alternative to the conventional wisdom to better understand why the racial wealth gap persists. (JEL J15, Z13)

Federal Reserve Bank of St. Louis Review, First Quarter 2017, 99(1), pp. 59-76.

Much of the framing around wealth disparity, including the use of alternative financial service products, focuses on the poor financial choices and decisionmaking on the part of largely Black, Latino, and poor borrowers, which is often tied to a culture of poverty thesis regarding an undervaluing and low acquisition of education.

This framing is wrong--the directional emphasis is wrong. It is more likely that meager economic circumstance--not poor decisionmaking or deficient knowledge--constrains choice itself and leaves borrowers with little to no other option but to use predatory and abusive alternative financial services.

To make this point, what better indicator of economic circumstance is there than wealth? Wealth serves as a primary indicator of economic security. Wealthier families are better positioned to finance elite, independent school and college educations, access capital to start a business, finance expensive medical procedures, reside in neighborhoods with higher amenities, exert political influence through campaign financing, purchase better counsel if confronted with an expensive legal system, leave a bequest, and/or withstand financial hardship resulting from any number of emergencies (Hamilton and Darity, 2009). Wealth provides

Darrick Hamilton is an associate professor of economics and urban policy at The New School. William A. Darity, Jr. is the Samuel DuBois Cook Professor of Public Policy, African and African American Studies, and Economics at Duke University. This article was prepared for presentation at the symposium, "Does College Level the Playing Field? Racial and Ethnic Differences in Family Wealth Among College-Educated Families," sponsored by the Center for Household Financial Stability and the Research Division of the Federal Reserve Bank of St. Louis, May 25-26, 2016.

? 2017, Federal Reserve Bank of St. Louis. The views expressed in this article are those of the author(s) and do not necessarily reflect the views of the Federal Reserve System, the Board of Governors, or the regional Federal Reserve Banks. Articles may be reprinted, reproduced, published, distributed, displayed, and transmitted in their entirety if copyright notice, author name(s), and full citation are included. Abstracts, synopses, and other derivative works may be made only with prior written permission of the Federal Reserve Bank of St. Louis.

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financial agency over one's life. Simply put, wealth gives individuals and families choice; it provides economic security to take risks and shield against financial loss. It is analogous to what the Nobel Laureate economist Amartya Sen (2010) has referred to as a human capability approach to development.

Finally, wealth is iterative: It provides people with the necessary initial capital to purchase an appreciating asset, which in turn generates more and more wealth, and can be passed from one generation to the next.

The popularity of Thomas Piketty's book Capital in the 21st Century (2013) has brought considerable attention to the role of wealth in determining life chances and the growing worldwide problem of structural inequality that is locked in at birth as a result of laws, policies, institutions, and economic arrangement. In the U.S. context, data from the Federal Reserve's Survey of Consumer Finances indicate that in 1989 the top 10 percent of households held about two-thirds of the nation's private wealth, and by 2013 this disparity accelerated with the top 10 percent now holding about three-quarters of the nation's private wealth (Bricker et al., 2014). Moreover, the bottom half of all households owns only about 1 percent--this provides a novel way of thinking about the 1 percent.

What is frequently overlooked in these disparities is that they are even more pronounced when race is considered. In fact, race is a stronger predictor of wealth than class itself. For instance, Blacks and Latinos collectively make up about 30 percent of the U.S. population, but collectively they own about 7 percent of the nation's private wealth (Bruenig, 2013).

Despite these enormous disparities, the public sentiment seems to be that the civil rights period has largely addressed major racial structural barriers. This sentiment is coupled with the notions that Blacks need to "stop making excuses" and, ultimately, "take personal responsibility" for their low socioeconomic position. It is this trope that particularly emphasizes a group-based underappreciation and underinvestment in personal and human capital development on the part of Blacks. If Blacks (and other subaltern communities of color, such as Native Americans, Mexicans, Filipinos, Puerto Ricans, and Vietnamese) simply would reverse their self-sabotaging attitudes and behaviors, full equality could be achieved (Aja et al., 2014).

By defining the central problem facing the Black community as not the deep-seated structures that perpetuate racism, but rather deficiencies internal to Blacks themselves, the focus of policy would become the rehabilitation of the Black family as opposed to addressing ongoing structural barriers such as inadequate capital finance endowment (Aja et al., 2014).

It is as if, after the passage of civil rights legislation, conventional explanations for racial disparity evolved from biological to cultural determinism. For instance, a report released in February 2015, entitled the "Demographics of Wealth," begins by characterizing middle- and older-aged, educated Whites and Asians as "thrivers" and young, less educated Blacks and Latinos as "strugglers" (Boshara et al., 2015). The problem with this language is the implicit notion that the racial wealth gap is a matter of financial literacy, choice, and agency, as opposed to inheritance and structure. It does not offer sufficient attention to the intergenerational and iterative role of wealth creation.1

The report by Boshara et al. (2015) attributes the racial wealth gap to Blacks and Latinos investing in what they characterize as "low-return" housing assets as opposed to more "con-

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servative" liquid assets. The consumption and tax-preferred status of owning a home should be noted. It is structural that a home is the first major asset in which Americans typically invest regardless of race. More importantly, Whites generally have more resources to invest--not only do they invest more in liquid assets, they also invest more in homeownership. Attributing the racial wealth gap to Whites having a more diverse asset portfolio is ambiguous, given that it is wealth in the first place that is associated with having a more diverse asset portfolio.

The report by Boshara et al. (2015) links the difference in "financial health" to the racial wealth gap, where financial health is measured by constructing an additive index based on self-reports indicating whether a respondent (i) saved last year, (ii) missed a payment last year, (iii) carried over a credit card balance at the end of a payment period, (iv) has more than 10 percent of the value of their assets in liquid form, or (v) has a debt-to-income ratio less than 40 percent. Again, the concern is reverse causality--the constructed index is at least as much a product of financial resource as it is a predictor of financial resource.

Ultimately, the conclusion that Boshara et al. (2015) have "...document[ed] profound and persistent differences in financial behaviors and financial outcomes across racial and ethnic groups in the United States" lacks an accounting for the fact that Whites have greater financial resource endowment in the first place, which is associated with both greater wealth and more diversified asset portfolios.

Financial behavior and financial literacy are practically limited for households and race groups with little to no finances to manage. Even still, Gittleman and Wolff (2004), using panel data that predate the predatory subprime and mortgage market crisis that led up to the Great Recession, find no significant racial advantage in asset appreciation rates for households with positive assets once household income is controlled. This finding is inconsistent with the notion that Blacks possess a lower financial acumen as an explanation for the racial wealth gap--and this is despite the well-documented evidence of historical and ongoing housing and lending discrimination (Bocian, Li, and Ernst, 2010; Institute on Race and Poverty, 2009; Oliver and Shapiro, 2006; Katznelson, 2005).

Also, the Gittleman and Wolff (2004) study is at odds with the belief that, in search of immediate gratification, Blacks are profligate when it comes to saving. They confirm that the savings component of wealth reveals a slight savings edge for Black households, again after adjusting for household income. This is consistent with the historical evidence generated by economists ranging from Milton Friedman (1957) to Marjorie Galenson (1972) to Marcus Alexis (1971), who all find that, after accounting for household income, Blacks have a slightly higher savings rate than Whites.

LIQUID ASSETS

When it comes to liquid assets--financial assets that can be readily converted into cash-- Blacks and Latinos are nearly penniless. Based on the 2011 Survey of Income and Program Participation (SIPP), Black families have about $200 in median liquid assets, which is over 100 times less than White families with $23,000 in median liquid assets (Tippet et al., 2014). For Latino families, the median is only $340, while the Asian median estimate is $19,400.2

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Moreover, if retirement savings are removed from our estimates of liquid assets, then the typical White or Asian family has only $3,000 in liquid assets. That is dramatically larger than the $100 and $25 respective "financial cushions" for Latino and Black families to deal with any expected or unexpected expenses or budgetary shortfalls. To put this in context, $25 would not be enough to feed a Black family of four for a single day (Tippet et al., 2014).

COLLEGE DEBT, INCOME VOLATILITY, AND DISCOURSE

The conventional wisdom often presumes a wide racial variance in debt as indicative of Black and Latino financial irresponsibility--however, such a presumption is not empirically valid. Tippet et al. (2014) find that 47 percent of White families reported some unsecured debt, which is slightly more than the estimates of 45, 44, and 42 percent for Blacks, Latinos, and Asian families. Moreover, after controlling for basic socioeconomic and demographic characteristics, we find no significant difference between Black and White unsecured debt holdings, while both Asian and Latino families had significantly less unsecured debt than their White family counterparts.

The SIPP data identify three categories of unsecured debt: (i) store bills and credit card debt, (ii) loans from a bank or credit union, and (iii) "other" types of debts, including student loans and medical bills. It is the "other" category where we find significant differences by race-- 21.5 percent for Blacks, 19 percent for Whites, 15 percent for Latinos, and 14 percent for Asians. It is important to note that this debt category represents borrowing for school and other critical needs including medical attention (Tippet et al., 2014).

Among the relatively well-off students who are able to attend college, Black students are 25 percent more likely to accumulate student debt and are, on average, borrowing over 10 percent more than their White student counterparts (Paul et al., 2016). To compound the liability of debt, Black students are one-third less likely to complete their degrees, often because of the greater financial burden that precipitated student loan borrowing in the first place; 29 percent of Black students and 35 percent of Latino students who leave college after their first year do so for financial reasons (Paul et al., 2014).

We know that not all debt is the same. In fact, some debt is indicative of good financial health. For instance, housing debt and student loan debt traditionally have provided Americans with access to financing to purchase the economic security of an appreciating asset of a house or a job in the professional or managerial sector, whereas credit card debt and other unsecured debt have traditionally been associated with the liability of an exhaustible consumption good or some other depreciating asset.

However, what we traditionally perceive as good and bad debt has different implications once we consider the following factors: race, the prevailing framework of targeting unprivileged racial groups with inferior housing and educational products, predatory finance, and ongoing housing and labor market discrimination. These factors limit the choice set and rates of returns to homeownership and a college degree, all based on race and ethnicity.3

For instance, a 2014 report from the Wisconsin HOPE lab, which studies higher education and student loan trends, finds that "[n]ot only have black students always borrowed more

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Table 1

Four-Year College/University Graduation Rates within Six Years from Enrollment in 2007

College/university type Public Nonprofit (private) For-profit (private)

White 60.7 68.3 39.9

Student race/ethnicity (%)

Black

Latino

40.3

50.7

44.7

60.9

22.4

35.0

SOURCE: Figures are based on National Center for Education Statistics (NCES); .

Asian 68.0 77.0 43.1

than white students, for as long as the federal government has tracked these things, but the growth in take-up rates of federal student loans between 1995-96 and 2011-12 was also greater for black students than white students" (Goldrick-Rab et al., 2014). The differences are especially acute for the riskiest student loans, such as parent loans and other unsubsidized loans. These loans come with higher interest rates, fewer safeguards for managing long-term repayment, and higher rates of default (Hamilton et al., 2015).

There is also evidence that for-profit colleges and universities, which often issue misleading claims about graduation and job placement rates, disproportionately enroll and target Black students (see Huelsman, 2015).4 Huelsman (2015) describes for-profit college experiences as often resulting in a "low-value debt bomb," where the average student debt is close to $40,000, about $15,000 more than comparable graduates at public four-year colleges accumulate and over $6,000 more than the student debt for graduates at historically Black colleges and universities (HBCUs).

An even larger problem--particularly relevant for Black and Latino students--is accruing college debt without ultimately attaining a degree. Table 1 illustrates the college completion rates within six years of enrollment beginning in 2007 by college and university type and by race and ethnicity. Asians have the highest completion rates across all school types, while Blacks have the lowest. For-profit colleges and universities have the lowest graduation rates across all racial and ethnic groups with completion rates more than 20 percentage points less than public college enrollment for all groups. Nearly 80 percent of Black students who enroll in a for-profit four-year college will drop out within six years. Students enrolled at public colleges typically are faced with tens of thousands of dollars less in debt compared with those at for-profit schools. When queried if they would do it over again, Black and Latino borrowers indicated substantially more regret for taking out student loans than their White counterparts (Pew Charitable Trusts, 2015).

Further, the growing context of income volatility in U.S. labor markets, where Americans increasingly have less control of when and for how long they work, is even more pronounced based on race and class (Lambert et al., 2013; Hardy and Ziliak, 2014; Hardy, 2016). This makes access to short-term credit even more essential. Thus, there is greater pressure for more Americans to turn to credit cards to meet short- and long-term budgetary shortfalls.

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This pressure to resort to use of credit cards occurs despite an attitudinal disdain for credit card debt based on surveys measuring consumer attitudes toward various financial products (Pew Charitable Trusts, 2015). Worse than credit card debt, given their greater vulnerability to income volatility and little to no liquid assets, Black and Latino families have a greater need for unconventional predatory lending products such as payday loans as a last resort to deal with any number of financial exigencies or budgetary shortfalls.

Payday loans are marketed as short-term holdover loans until the borrower's next payday, but the big problem with these exorbitantly high interest rate products is that they often lead to debt traps that absorb more and more of the borrower's income in interest and fees until, ultimately, the borrower defaults on the original principal (Wolff, 2015). Evidence from the U.S. Financial Diaries (USFD) project indicates that these predatory products are often truly used as last-resort finance options (Morduch and Schneider, 2013).

Still, the Pew Charitable Trusts (2015) report on American debt concludes that the racial wealth gap has more to do with a lack of assets for Black and Latino families than racial variation in debt or an abundance of debt on the part of Blacks and Latinos. Instead, the report cites other research as suggesting that inheritance and other intergenerational wealth transfers benefit Whites to a much larger extent.

Nonetheless, conventional discourse upheld by Democrats, Republicans, Blacks, and Whites alike still emphasizes education and personal responsibility on the part of Blacks themselves as the mechanism to bridge the racial divide. It is a narrative that the nation's first Black president has been advancing. Take, for instance, the 2004 Democratic National Convention, when then-candidate for Illinois U.S. Senate seat Barack Obama delivered a keynote address. His speech called for American harmony, making the case that we are not red and blue states, liberals and conservatives, but rather we are the United States. Within his theme of unity, one section of the speech made mention of race:

Go into any inner-city neighborhood, and folks will tell you that government alone can't teach kids to learn.

They know that parents have to teach, that children can't achieve unless we raise their expectations and turn off the television sets and eradicate the slander that says a black youth with a book is acting white. They know those things.5

Obama uses the occasion of his first national platform to single out and chastise Black youths and their families as the cause of their own underachievement with an emphasis on education. Obama reiterated the themes of his 2004 keynote in his "More Perfect Union" speech as a presidential candidate in 2008, adding that Blacks should cease making particularistic claims on America (Hamilton and Darity, 2010).

For the African-American community, that path [to a more perfect union] means embracing the burdens of our past without becoming victims of our past. It means continuing to insist on a full measure of justice in every aspect of American life. But it also means binding our particular grievances--for better health care, and better schools, and better jobs--to the larger aspirations of all Americans--the white woman struggling to break the glass ceiling, the white man who's been laid off, the immigrant trying to feed his family. And it means taking full responsibility for our own lives. [Emphasis added]6,7

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These comments exemplify a dominant political discourse on race and racial disparity that emphasizes (i) that in the aftermath of the civil rights movement, America has largely transcended its racial divide; (ii) that whatever racial disparities remain are overwhelmingly the result of actions or inaction on the part of Blacks themselves; and (iii) that there is nothing particular about the oppression experienced by Blacks, as such Blacks should cease making particularistic claims on America (Hamilton, 2015). The implication of this discourse is a shift in public sentiment away from a public responsibility for the condition of Black America (Hamilton and Darity, 2009).

THE POLITICAL DISCOURSE OF RACE AND AFFIRMATIVE ACTION IN HIGHER EDUCATION

Take affirmative action for example. Although it is designed as a positive antidiscrimination policy aimed at desegregating elite institutions, including university admission, a common perspective among Whites and growing perspective among Blacks is that it amounts to "reverse discrimination," where "unqualified Blacks" take the admissions slots from "qualified Whites." Not only does this argument underscore a White entitlement to preferred positions, but it also assumes that Whites generally are "qualified," and by default, Blacks generally are not. It ignores the historical advantage and protected access Whites continue to hold through admissions preferences for university legacies, children of donors, and other channels, which serve as examples of hidden affirmative action for the privileged group (Darity et al., 2014).

There is also the well-documented evidence from experimental psychology, developed by Claude Steele and Joshua Aronson (1995), involving the phenomena of stereotype threat, stereotype boost, and stereotype lift. Collectively, these effects demonstrate that outcomes on high-stakes standardized tests such as the SAT underestimate the achievement and college readiness for test takers from groups whom society stigmatizes as cognitively inferior and, correspondingly, it exaggerates the scores for individuals from groups whom society deems cognitively superior. The concern that elite universities are going to be overrun by "underqualified" and "unmeritorious" Blacks should be replaced with the more alarming concern that the absence of affirmative action would likely strengthen the historical advantage and protected access for the more privileged White group.

Another popular belief is that a "fairer" form of affirmative action is to substitute family income for race as a criterion for selective college admissions. Undoubtedly, class- and racebased affirmative action policies are not mutually exclusive and both could contribute to desegregating elite institutions, but race-based affirmative action is specifically designed to combat persistent racial discrimination, while class-based policies are not. Indeed, Blacks from more affluent families are not insulated from racial discrimination.8

Despite the promise of integration, the college experience remains markedly different based on race. For instance, Black students frequently report feelings of isolation and the burden of representing their race in alien spaces on predominantly white campuses. In fact, some spaces are explicitly hostile. Recall the March 15, 2015, video of members from the Sigma Alpha Epsilon chapter at the University of Oklahoma singing, "There will never be a nigger at SAE. You can hang him from a tree, but he'll never sign with me. There will never be a nigger

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at SAE."9 The SAE Oklahoma chapter was immediately closed, but the damage from this egregious case, which just happened to be caught on video, was clear (Hamilton et al., 2015).

The concerns of racial hostility on majority White campuses are not always in response to student actions. For instance, a study eventually published in the Journal of Labor Economics conducted by two Duke University faculty members and a graduate student (Peter Arcidiacono, Esteban Aucejo, and Kenneth Spenner, 2012) claiming that Black students at highly selective institutions tend to switch from what they deem as "harder" majors (natural sciences, engineering, and economics) to "softer" majors (humanities and social sciences) as a result of enrolled Black students possessing weaker academic backgrounds. In response to the study, the Black students at Duke protested and claimed that the study was both "hurtful and alienating."10

Arcidiacono, Aucejo, and Spenner (2012) used SAT scores as the indicator of weaker academic preparation. The mean SAT scores for the math and verbal sections for the cohort of students examined were 1416 for White students and 1275 for Black students, a difference of only about 140 points. As pointed out earlier, the irony with the use of SAT scores is that it is the presence of the stereotype itself that severely lowers performance of Black students on the SAT. Moreover, Talia Bar and Asaf Zussman (2012) found that faculty in the natural sciences tend to assign lower grades to Black and Latino students, even after controlling for their actual SAT scores. This suggests that the ongoing stereotype of cognitive inferiority, albeit implicit or explicit, is often ascribed to Black students by faculty at predominantly White institutions (PWIs). Thus, in this context of discouragement, there are disincentives for Black students to major in science and math, irrespective of academic preparation (Darity et al., 2014).

Over 80 years ago, in his 1935 essay entitled "Does the Negro Need Separate Schools?" W.E.B. Du Bois accentuated the need for a stereotype-safe environment with a "sympathetic touch between teacher and pupil." In Du Bois's own words:

It is simply calling a spade a spade. It is saying in plain English: that a separate Negro school, where children are treated like human beings, trained by teachers of their own race, who know what it means to be black in the year of salvation 1935, is infinitely better than making our boys and girls doormats to be spit and trampled upon and lied to by ignorant social climbers, whose sole claim to superiority is ability to kick "niggers" when they are down. I say, too, that certain studies and discipline necessary to Negroes can seldom be found in white schools.

For Du Bois (1935) it was not a question of segregation versus integration per se; "a mixed school with poor and unsympathetic teachers with hostile public opinion...is bad," and a segregated school with "inadequate equipment, poor salaries, and wretched housing is equally bad." Du Bois recognized that learning environments are shaped by peer cooperation and that administrators, teachers, and students shape the culture and curriculum of the educational process by influencing students' norms, motivations, aspirations, and educational content (Hamilton, 2014).

HISTORICALLY BLACK COLLEGES AND UNIVERSITIES AND ALUMNI DONOR CAPACITY

Rather than living up to a self-fulfilling prophecy of anticipated academic failure by Black students, HBCUs offer Black students the potential of a "stereotype-safe" environment

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